Serba Dinamik Holdings Bhd
(April 24, RM4.20)
Maintain buy with unchanged fair value (FV) of RM6.50: We maintain our “buy” call on Serba Dinamik Holdings with unchanged forecasts and sum-of-parts-based FV of RM6.50 per share, which implies a forecasted financial year 2019 (FY19F) price-earnings ratio (PER) of 20 times — 33% below Dialog Group Bhd’s 30 times, the company’s closest peer in Malaysia.

 
Serba Dinamik is planning to raise a sukuk issuance worth US$200 million (RM826 million) to US$250 million for a tenure of thee years to refinance its existing foreign loans and international projects.

The group’s foreign debt accounts for 40% of gross debt of RM1.7 billion as at Dec 31, 2018, of which RM496 million is scheduled to be repaid this year.

The group is earmarking US$80 million to US$130 million for engineering, procurement and construction projects in Laos, Tanzania and Uzbekistan, as well as working capital for Middle Eastern operation and maintenance contracts.

While the group has already issued an RM800 million sukuk programme in October last year and retained the outstanding proceeds of RM419 million from its RM407 million initial public offering in February 2017, and RM427 million private placement in January 2018, this new foreign-denominated debt issue circumvents the conversion of the ringgit, which requires Bank Negara Malaysia approval.

S&P Global Ratings has assigned a preliminary “BB-” rating for long-term issuer credit and guarantees. Fitch Ratings has accorded a long-term issuer default rating of “BB-” with a stable outlook. These could mean an interest rate of 5.5%, higher than Serba Dinamik’s average gross interest rate of 5.1% in FY18.

We are “neutral” on this development, which is part of the group’s financing programme for international expansion. While net gearing has risen to 0.45 times as at fourth quarter (4Q) of FY18 from 0.29 times in 4QFY17 due to the pipeline of multiple projects, the management reaffirms that Serba Dinamik does not require any equity-raising exercise.

The management expects the continuation of strong revenue growth this year driven by growing demand in the Middle East and Southeast Asia (SE Asia), spearheaded by the United Arab of Emirates and Qatar. Most of the growth will be underpinned by Serba Dinamik’s operation and maintenance (O&M) services, which account for 89% of the group’s FY18 revenues.

Serba Dinamik is currently trading at a grossly undervalued FY19F PER of 12 times versus over 30 times for Dialog Group. We remain positive on Serba Dinamik’s O&M model, which is expanding its long-term recurring earnings profile by strategically leveraging its engineering, procurement, construction and commissioning, and asset ownership platform. — AmInvestment Bank, April 24